CFAS Note 3

CONCEPTUAL FRAMEWORK & ACCOUNTING STANDARDS

PAS 29 FINANCIAL REPORTING IN HYPERINFLATIONARY ECONOMIES

Learning Objectives

  • State the core principle under PAS 29.

  • Describe the restatement procedures under PAS 29.

The Stable Monetary Assumption

  • Under the stable monetary assumption, the purchasing power of money is assumed to be stable. Therefore, inflation is ignored except in conditions of hyperinflation.

Price Level Changes

  • General price level changes and the purchasing power of money have an inverse relationship:

    • If the general price level increases, the purchasing power of money decreases (this condition is called inflation).

    • If the general price level decreases, the purchasing power of money increases (this condition is termed deflation).

Hyperinflation

  • Hyperinflation occurs when inflation is “very high.”

  • PAS 29 does not establish an absolute rate for defining hyperinflation; this is left to judgment.

Indicators of Hyperinflation

  1. The population prefers to hold wealth in non-monetary assets or in a stable foreign currency. Local currency is quickly invested to mitigate purchasing power loss.

  2. The population values monetary amounts in terms of a stable foreign currency rather than the local currency. Prices may be quoted in this stable currency.

  3. Credit transactions are priced to compensate for expected purchasing power loss, even over short periods.

  4. Interest rates, wages, and prices are linked to a price index.

  5. The cumulative inflation rate exceeds 100% over three years.

Core Principle

  • Financial statements of an entity with a functional currency in a hyperinflationary economy must be stated in terms of the measuring unit current at the end of the reporting period.

  • Comparative information for the previous period must also be stated in terms of the current measuring unit.

  • Presentation of information as a supplementary section to unrestated financial statements is not allowed.

  • Separate presentation of financial statements before restatement is discouraged.

Restatement of Financial Statements
Statement of Financial Position

  • Only non-monetary items not already stated in terms of the measuring unit current at the reporting period are restated using constant peso accounting.

  • Monetary items are not restated as they are already expressed in current terms.

  • Monetary Items: Include money held and items to be received or paid in fixed amounts of money.

    • Examples of Monetary Assets:

      1. Cash and cash equivalents

      2. Loans and receivables and their related allowances

      3. Financial assets at amortized cost

      4. Finance lease receivables

      5. Cash surrender value

    • Examples of Monetary Liabilities:

      1. Financial liabilities at amortized cost (e.g., accounts, notes, bonds)

      2. Accrued expenses payable in fixed amounts of money

      3. Refundable deposits (e.g., security deposits)

      4. Dividends payable

Non-Monetary Items

  • Non-monetary items are those not classified as monetary except for retained earnings. Retained earnings serve as a balancing figure post-restatement.

    • Examples of Non-Monetary Assets:

      1. Physical assets (inventories, property, plant, equipment)

      2. Intangible assets

      3. Financial assets measured at fair value

      4. Advances and prepayments not collectible in cash

    • Examples of Non-Monetary Liabilities:

      1. Financial liabilities measured at fair value

      2. Unearned items not payable in cash

      3. Warranty obligations to be settled by non-monetary items

Non-Monetary Items Carried at Other Than Cost

  • Generally, only non-monetary items measured at cost are restated. The following need not be restated:

    1. Non-monetary items at net realizable value (NRV) or fair value at reporting period’s end

    2. Non-monetary items measured at revalued amounts at the reporting period’s end

Restatement of Financial Statements

  • All item in the statement of profit or loss and other comprehensive income undergoes restatement.

  • Formula for Restatement: If historical price indices are impracticable to determine, the average general price index for the period may suffice.

  • Gain or Loss on Net Monetary Position: Recognized in profit or loss as 'purchasing power gain or loss'.

PAS 32 FINANCIAL INSTRUMENTS

Definition

  • Financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial Assets

  • Definition: Any asset that is:
    a. Cash;
    b. An equity instrument of another entity;
    c. A contractual right to receive cash or another financial asset from another entity;
    d. A contractual right to exchange financial instruments with another entity under favorable conditions;
    e. A contract that will or may be settled in the entity’s own equity instruments not classified as the entity’s own equity instrument.

Financial Liabilities

  • Definition: Any liability that is:
    a. A contractual obligation to deliver cash or another financial asset to another entity;
    b. A contractual obligation to exchange financial assets or financial liabilities under unfavorable conditions to the entity;
    c. A contract that will or may be settled in the entity’s own equity instruments and not classified as the entity’s own equity instrument.

Equity Instrument

  • Definition: Any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.

Examples

  • Financial Assets:
    a. Cash and cash equivalents (including cash on hand)
    b. Receivables (accounts, notes, loans)
    c. Investments in equity or debt instruments (held for trading securities)
    d. Sinking fund and other long-term funds.

  • Non-Financial Assets:
    a. Physical assets (e.g., inventories, biological assets)
    b. Intangible assets
    c. Prepaid expenses
    d. The entity’s own equity instruments.

Examples of Financial Liabilities

  • Payables (accounts, notes, loans, bonds)

  • Lease liabilities

  • Held for trading liabilities and derivative liabilities

  • Redeemable preference shares issued

  • Security deposits

Offsetting Financial Assets & Liabilities

  • A financial asset and a financial liability are offset when there is a legal right of setoff and intention to settle on a net basis or simultaneously.

PAS 33 EARNINGS PER SHARE

Learning Competencies

  • Explain how basic and diluted earnings per share are computed.

Definition

  • Earnings per share (EPS) is a profitability ratio that indicates how much was earned by each ordinary share during a given period.

  • EPS is not presented for preference shares since these have fixed returns equivalent to dividend rates.

Types of Earnings per Share

  1. Basic earnings per share

  2. Diluted earnings per share

Basic Earnings Per Share
Considerations in Computing Profit or Loss

  • Profit or loss should be net of income taxes and adjusted for after-tax amounts of preference dividends.

  • Adjustments for Preference Dividends:

    • Cumulative preference shares: One-year dividend deducted from profit/loss, whether declared or not.

    • Non-cumulative: Only declared dividends are deducted from profit/loss.

Weighted Average Number of Outstanding Ordinary Shares

  • Shares are time-weighted from the date consideration is receivable.

    • Shares issued outright are averaged from the issue date.

    • Treasury shares are averaged:
      i. As a reduction of outstanding shares from reacquisition date.
      ii. As an addition when reissued.

Restatement of EPS

  • EPS in previous periods is adjusted retrospectively when a capitalization or bonus issue occurs, or with share splits or reverse share splits.

Diluted Earnings Per Share
Definition

  • Diluted EPS reflects profit per share, accounting for maximum dilutions from conversions or exercises that would decrease basic EPS.

  • Only basic EPS is presented if no dilutive potential ordinary shares exist.

Computation

  • Assumes the conversion of preference shares or bonds, or the exercise of options or warrants occurred.

Treasury Share Method

  • Used for making incremental share computations by assuming options/warrants are exercised, using proceeds to repurchase treasury shares at average market price.

Financial Statement Presentation

  • Basic and Diluted EPS computed must be presented in statements for profit or loss and other comprehensive income, including:

    1. Profit or loss from continuing operations

    2. Profit or loss from discontinued operations (if applicable)

PAS 34 INTERIM FINANCIAL REPORTING

Learning Objectives

  • Define an interim financial report and state the scope of PAS 34.

Definition

  • Interim reporting relates to preparing and presenting interim financial reports for interim periods. An interim period is shorter than a full financial year.

  • Interim Financial Report:

    • A financial report with complete or condensed financial statements for an interim period.

Scope

  • PAS 34 does not mandate interim financial reports but applies when required by governmental regulations, stock exchanges, or voluntarily by entities.

  • PAS 34 encourages semi-annual interim reports published within 60 days post interim period.

Content of Interim Financial Reports

  • Entities can comply with PAS 1 (complete FS) or PAS 34 (condensed FS).

  • Minimum Content under PAS 34:

    1. Condensed statement of financial position.

    2. Condensed statement of profit or loss and other comprehensive income.

    3. Condensed statement of changes in equity.

    4. Condensed statement of cash flows.

    5. Selected explanatory notes.

Additional Concepts

  • Relevance over Reliability: Less information may be provided for timeliness.

  • Materiality and Estimates: Greater reliance on estimates during interim reporting.

  • Note Disclosures: Only selected notes are provided to avoid redundancy.

Recognition and Measurement

  • Gains/losses are recognized immediately; costs are spread over interim periods.

  • Income tax expense calculated using the best estimate of expected annual tax rate.

PAS 36 IMPAIRMENT OF ASSETS

Learning Competencies

  • State the core principle of PAS 36 and account for impairment of assets and cash-generating units.

Core Principle

  • An asset is impaired if its carrying amount exceeds its recoverable amount, and this excess is termed impairment loss.

Measurement of Impairment Loss

  • Recoverable Amount: Higher of fair value less costs of disposal and value in use.

    • Value in Use: Present value of future cash flows from the asset or CGU.

Identifying Impairment

  • An entity must assess at each reporting period for impairment indications, estimating the recoverable amount if any indication exists.

Indicators of Impairment
External Sources:

  1. Decreased asset value beyond expected depreciation.

  2. Changes in legal or economic framework negatively impacting asset value.

  3. Rising interest rates affecting asset valuation negatively.

  4. Carrying amount exceeds market capitalization.

Internal Sources:

  1. Evidence of physical damage or obsolescence.

  2. Adverse changes impacting asset's expected use.

  3. Internal reports indicating poor economic performance of assets.

Required Testing for Impairment

  • Assets requiring annual testing include:

  1. Intangible assets with indefinite lives.

  2. Intangible assets not yet in use.

  3. Goodwill from business combinations.

Recognizing and Measuring Impairment Loss

  • Recognized in profit or loss unless carried at revalued amount; in which case the revaluation surplus is decreased first.

PAS 38 INTANGIBLE ASSETS

Learning Objectives

  • Define intangible assets and their capitalizations on acquisition.

Definition of Intangible Assets

  • An identifiable non-monetary asset without physical substance. Goodwill is excluded from PAS 38 scope.

Recognition Criteria

  • Intangible assets must be identifiable, controlled, and expected to provide future economic benefits.

Initial Measurement

  • Measured initially at cost depending on acquisition type:

  1. Separate acquisition.

  2. Business combination acquisition.

  3. Government grant acquisition.

  4. Asset exchange.

  5. Internal generation.

Subsequent Measurement

  • Choose between cost model or revaluation model if an active market exists.

  • Amortize intangible assets with finite lives over the shorter of asset’s life or legal life.

  • Assets with indefinite lives are not amortized but tested for impairment annually.

PAS 40 INVESTMENT PROPERTY

Learning Competencies

  • Define investment property and state its measurement requirements.

Definition of Investment Property

  • Defined as property held to earn rentals or for capital appreciation rather than for production, supply of goods, services, or ordinary sales.

Measurement

  1. Initial measurement at cost.

  2. Subsequent measurement using either cost model or fair value model:

    • Changes in fair values recognized in profit or loss.

  3. Transfers between categories authorized on change of usage.

PAS 41 AGRICULTURE

Learning Objectives

  • Differentiate biological assets, bearer plants, agricultural produce, and inventory. State measurement of biological assets.

Scope of PAS 41

  • Applied to biological assets (except bearer plants), agricultural produce at harvest, and unconditional government grants associated with biological assets.